The China A-share Market is Definitely a Rollercoster-The Question Is, Are We On the Way Up or Down?

We've finally returned from the May holiday

here in China. For all the credit China gets for working hard, and much of it is well deserved, there are three different times during the year when the entire country takes a whole week off. As a beneficiary of this policy I cannot complain because it provides ample opportunity for travel. It just cannot do much for productivity. Think if the entire US was off for a whole week three different times during the year. I cannot even think of a time where the entire country takes two days in a row off. Maybe a little lack of productivity is what you want when you are aiming to emply 1.3 billion people. Creating that many jobs in a super productive environment would be a challenge for anyone. I guess that is why when we go to department stores, there are 15 people ready to help.

Anyway, we are back and the the pent up demand for A-shares is evident. I guess retail investors didn't spend all of their money during the May holiday on stuff they probably don't need (an estimated $550 million was spent in Shanghai alone over the 7 day holiday). The Shanghai Composite Index is already up 2.6 percent for the day sitting at about 3941, yet another all-time high (yawn).

China is definitely the wild wild East and its domestic A-share stock market is a rollercoaster. The question is, are we on the way up or down. If we are on the way down, as is commonly asked at the Grand Canyon, how far is it to the bottom? Are we in for a Beowulf-like plunge? I think the above charts says it all. I'll leave it to you to draw your own conclusions. Buyer beware!

Why Chinese Entrepreneurs Rock!!

On a recent trip to Thailand, I was reminded over and over again why Chinese entrepreneurs or even just businesspeople in general, rock. I spent the May Holiday (essentially Labor Day in China) running around the island of Phuket just off the coast of Thailand. I was doing everything one would expect in such as locale: jet skiing in the ocean, island hopping (yes, I did see the location where The Beach was filmed, see the attached picture), snorkeling, getting buried in sand, buying some great T-shirts, drinking pinnacaladas, getting sun burned, eating great Thai food and just being a bum. My only regret was missing the opportunity to see a Thai boxing match and riding the token elephant, but that is what second trips are for. I really questioned whether or not it made sense to return to the chaos.

We can all agree Thailand is the quintessential tropical location. It rains almost every afternoon in Thailand. During the last night of my vacation, the rain forgot to stop and continued on into the night. It must have rained, and rained hard, for 8 hours straight. The water level in the street rose to my mid-calf. I wasn't afraid of melting, actually I rather enjoy the warm rain in Southeast Asia; I just didn't want to be drenched from head to toe when I went to eat dinner or into a shop to buy something. The toe part of that equation was already a lost cause, so I had only my head to keep above water. So, doing what I always do when it rains in China, I looked for the wave of people that suddenly appear on the street hawking umbrellas from $1 the second precipitation begins to fall. In Thailand, these people were nowhere to be found.

Maybe that one instance was an anomaly and not representative of how things usually are, but I was thinking to myself the whole time how this would never happen in China. In China, there would be 5 people standing in front of me with boat loads of umbrellas of every color imaginable undercutting each other with price wars to sway me in their direction. Maybe this simple example is a microcosm of why the Chinese economy continues to churn and grow at torrid rates year after year. Chinese entrepreneurs are enterprising people that look for opportunities at every turn.

In another example, I was walking through the shops on the beach just wasting time and money. I noticed some really cool paintings that looked very Thai to me, of Buddas and the like. I really wanted to buy one to put in my apartment, so I asked the shop owner about the price. He said, 7000 Baht (~$200 USD), without flinching. I laughed but he argued the merits of the price with me, reminding me over and over again the paintings were done by hand. I thought, "I can find something ever similar to that in China for 1/10th of the cost," so I politely told the guy I would think about it. He just let me walk out the door.

I could see they were actually doing the paintings in the shop, but, oddly, I saw the same paintings in shop after shop after shop. I wanted to know how he was getting at the $200 price, so I indiscreetly asked one of the guys doing the paintings how long it took him to do one. He said 2-3 days. I returned to the shop owner, wanting to judge his honesty, and asked him the same question. He answered "one week." So, not wanting to buy from that guy, I moved on.

I returned to a shop I had visited the day before where a Nepali girl (most of the store employees were from Nepal, Burma and India) had waited on me. She was there again, and I asked her about the price of the painting. The night before she had said 3000 Bhat, which was looking more and more like a reasonable price after a bit of market research. I told her if she came down to 2500 Bhat (~$71 USD), I would buy it. She used her cell phone to call her boss and came back to me with a down face. She told me her boss would only come down to 2800 Bhat. Realizing this was only the beginning of the negotiation and that I needed to talk with the decision maker, I asked her to call her boss back and let me speak to him. She did, and I worked him down to 2500 Bhat. When we were packaging the painting up for the trip back to China, knowing all of these paintings had to come from the same source, I asked her what her boss's cost was. Her best guess was 2000 Bhat. I could live with them making an 800 Bhat profit. I walked passed the first store owner and just lifted the packaged painting up. He knew I had bought elsewhere. I again thought to myself, a Chinese entrepreneur never would have let me walk out of his store without a heated negotiation. I guess they can afford to be more choosy in Thailand.

Chinese A-share Stock Market Hiccups...Again

After reaching an all time high earlier this week, the Chinese A-share stock market experienced a hiccup on Thursday falling 4.52 percent (163.38 points) to close at 3449.02. This correction, if you can call it that, was only half of the 9 percent pull-back the A-share market experienced on February 27 that sent a ripple effect to stock markets globally. Only 6 stocks reached the upward 10 percent daily trading limit on Thursday while over 40 fell by the 10 percent daily limit. This is a stark contrast to the past few months on the A-share market where approximately 50 stocks reached their upward daily limit on average while roughly 10 fell to the lower daily limit. Stocks reaching their upward daily limit on Thursday included three pharmaceutical companies: Da An Gene Co Ltd. (SHE-002030); Hubei Guangji Pharmaceutical (SHE: 000952); Chongqing Huapont Pharmaceutical (SHE: 002004).

The Chinese A-share market is largely driven by the whims of domestic retail investors instead of objective fundamental analysis that many in the west are accustomed to. Throughout the week, the sentiment was even the most optimistic retail investors were becoming increasingly apprehensive about the uninterrupted torrid upward movement of the market since the February 27 pull-back. More than 897,000 new trading accounts were opened from April 12-16, an average of roughly 200,000 per day. To put this statistic in context, approximately 850,000 trading accounts were opened during all of 2005. It is estimated these new market participants injected $800 million USD of capital into the market daily.

Following the 130 percent increase in the Chinese A-share stock market in 2006 and an over 30 percent increase thus far in 2007, a correction is natural. With the official Chinese May Holiday on the horizon next week, a continued ease off of the accelerator would not come as a surprise as domestic investors liquidate their holdings prior to the holiday. Many believe global investors were unjustifiably spooked by and overacted to the sudden pull-back in the Chinese A-share market on February 27. It will be interesting to see if history repeats itself and global markets take a cue from China's lead or if they brush the Chinese A-share market hiccup off as inconsequential.

Essence of a "Harmonious Society" is Lost in Translation

Every 5 years the CPC and Chinese Central Government devise a 5 year plan that will more or less direct the coming five years of development within China. It essentially serves as a road map defining the path the country should strive to travel over the next 5 years identifying areas of focus, specifying industries that should be built up, social issues that should be addressed, ect. The release of the 11th 5 Year Plan (2006-2010), was accompanied by the overall theme "to build a Harmonious Society."

This theme begs the questions, what exactly is meant by "build a harmonious society?" Answering this question is a bit subjective in nature. You'll get a different interpretation depending on who you as.

Below are a couple of interesting quotes from local media as to the meaning behind the theme. I'll leave it to you to draw your own conclusion:

"The resolution highlights the importance, guidelines and goals of building a socialist harmonious society. It puts forward the principles to be followed, the main objectives and tasks for building such a society by 2020, such as further improving the socialist democratic and legal system and narrowing the gap between urban and rural development and between different regions."

"The society in China now is generally harmonious. However, we do see disharmonies happening occasionally. This could be reflected in various gaps in development, between regions, between urban and rural areas, and between other areas. The increasing gaps are the problems we need to solve."

Building a harmonious society is not like building a bridge. How can you plan to have achieved that in 10 years or 15 years? How do you measure success of these efforts? Cultivating the mentalities and attitudes of people takes generations not 5 quarters. It isn't an infrastructure project. So what does this mean?

The best analogy I can think of is the scene in Bill Murray's "Lost in Translation" where he is sitting there shooting the whiskey commercial. There is a Japanese director instructing Bill Murray what to do, how to sit, ect. The problem is, the director is saying everything one hundred miles an hour in Japanese. Watching Bill Murray's facial expressions while the guy is yelling at him in Japanese is worth the price of admission. At the end of the director's 1 minute tirade, Bill's interpreter's say, "he said lower your head." Bill displays a very confused look on his face and responds with, "Is that everything? I mean, it seemed like he said quite a bit more than that." Bill's question is a reasonable one and one we should be asking regarding what exactly is meant by building a "harmonious society."

To many local Chinese, the government's aim with this theme is to try and solve fundamental problems within society, such as the blind pursuit of money. The government wants to cultivate a happy and peaceful culture and society in which people are content. But to me, the first questions that goes through my head is "is that everything? I mean, it seems like quite a bit more."

No one can question the progress of the Chinese economy over the past two decades. The growth and development has been nothing short of phenomenal and unprecedented in modern history. For that, the Chinese leadership should be commended. Having said that, many Chinese like to say "China is different." This statement comes up over and over again, regardless of the topic, when a Chinese person believes a foreigner isn't quite grasping what China is all about. I've stopped taking this personally because I've discovered, in some cases, Chinese people will say this to each other. If someone shows up in Shanghai from another province around China, local Shanghainese will be quick to say "you don't understand Shanghai" or something to that effect. This is a nice way of saying either "I don't know how to answer your question" or "you have no way of comprehending the answer to your questions, so I wouldn't bother wasting time giving you one." To me, every country in the world "is different" so I am not satisfied with this statement as an answer to everything.

To me, China isn't so different. It is much like many other countries in the world. The overreaching goals are to grow economically and provide people with a better life. China just happens to be bigger and have a longer history. Every time someone wants to engage me about the US, I could just as easily say, "you don't understand, the US is different" because it has a smaller more culturally diverse population and it is a younger country.

Regardless of how different China might me, laws of modern economics still apply. There has been lots of chatter both by onlookers abroad and economists/experts within China that China's economy is overheating and something needs to be done to slow growth. To me, this is the essence of the "build a harmonious society" theme for the 11th 5 Year Plan. The Chinese leadership is a sharp group. They realize the economy needs to be slowed down and have reverted to common economic tools to achieve this end such as raising interest rates 3 times in the past year, increasing the required reserve ratio for banks and even stating that many of the domestically listed companies lack the intrinsic value implied by their stock prices and in some cases should be delisted.

Despite these efforts to slow the economy, the China growth engine isn't listening as the economic growth is estimated to have accelerated to 11% in 1Q 2007 increasing from 10.4% growth in 1Q 2006, the local stock market is up over 30% during the 1Q 2007 following a sizzling 130% increase in the A-share market in 2006, a healthy pipeline of IPOs wait to list on the Shanghai Stock Exchange, exports experienced double-digit growth in 1Q, there are over $2 trillion in local savings that continue to be diverted into stock trading accounts to be invested in what is perceived to be a riskless market (oh contrar), the government has $1.2 trillion in foreign currency reserves, and fixed asset investment increased. What is not to like? The Chinese are a smart enterprising group that recognize opportunity when it presents itself.

To me, the translation for "build a harmonious society" is quite simple: slow down the growth by any means possible. Every approach using modern economic tools has been taken to slow growth to no avail. The fact that there are capital controls and a stock market that seems to only trend upwards at a 90 degree angle actually make these tools less effective rather than more effective. So, the approach to slowing growth is a softer one. The idea is to tell people not to focus so much on running after the all mighty dollar. As a result, people might stop focusing so much on making money and the economy might slowdown.

The logic behind the approach is understandable. People are probably listening and saying to themselves "yeah that is a good idea, other people should do that" as they scamper off to the local securities firm to make their next trade and continue ride the stock market tidal wave. Who can blame them? Where else, justified or not, can you get a 30% return in a week? I'd be doing the same if I could trade A-shares.

China Mobile Goes Underground, An Anhui Taxi Driver Weighs In On The Internet And A Bone Goes Missing

On a recent weekend trip to Huang Shan that included a minor bus accident, an insurance settlement negotiation on the highway, multiple wrong turns (left & right), a random wet driver pickup, a " mysteriously misplaced bone," 5 minutes of hail (no typo), a late-night Majiang showdown and pumpkin seed poker (who needs virtual currency), some new light was shed on the literal downward direction of China Mobile, Internet search and online gaming.

On a weekend that was meant for the PE Team to get away from it all, China Mobile was inescapable. In contrast to many of the wireless players who, despite their best efforts to avoid it, seem to bump into China Mobile at every turn, our weekend encounter with China Mobile was actually a welcomed one in the most unlikely of places. After arriving at Huang Shan (or at least nearby), we found ourselves in caves running like veins under the mountain that were dug out 1000 years ago, or so the tour guide said.

As is the case on most trips to the middle of nowhere, we were a little worried about whether or not we would get mobile service so far from our beloved Shanghai. Upon entering the cave, instead of being warned of swarming bats and falling stalactites, we were meant with a sign that read "China Mobile happily brings you service within these caves," or something to that effect. Right next to that sign was a similar one posted by China Unicom.

We laughed at the thought that even though China Mobile continues to add 5 million subscribers a month and make further inroads into second and third-tier cities, its expansion is not limited merely to a lateral direction. China Mobile is penetrating downward into the depths of caves that run through the base of China's mountains. Needless to say, we were all pleasantly surprised and impressed by China Mobile's reach. There is no word yet whether or not China Mobile will now add a vertical element to its future expansion strategy by offering service on the moon, but we wouldn't put it past them.

After emerging from the Huang Shan caves, the next day we found ourselves in a cab in route to some ancient city. We just couldn't help ourselves and engaged the cab driver in a discussion of Internet search and online gaming. When asked which Internet search engine he preferred, Baidu or Google, he answered Baidu, which came to little surprise. We attempted to dig a little deeper to understand why he preferred Baidu to Google and his answer was simple: "it's a Chinese company." This answer actually came as little surprise. In contrast to the west, where superior technology tends to prevail in the minds of consumers, many Internet users in China, particularly in Anhui (assuming our one person sample size is representative), still prefer local companies despite inferior technology.

Our conversation then shifted to online gaming. We learned that our taxi driver, who was probably 27, is a self-proclaimed "former gamer." His game of choice back in the day was Mir 2. We asked him why he wasn't playing anymore and he simply replied that he didn't have the time. We suspected time was likely one of a few variables driving this decision to walk away from gaming. As the gaming market in China matures and some gamers near retirement age (28-30) where time, job and family constraints make the time investment impossible, we see a niche market emerging. We suspect if there was a game on the market that would be fun for our taxi driver and his wife to play (his 2 year old daughter is not yet a gamer), he might consider dusting off the old mouse and sharpening some of those key stroke skills to get back in the game.

The story of the mysterious missing bone is more of an inside joke within my company. Suffice to say we were enjoying a typical 17 person dinner last Saturday night that included enough food for an army. One dish that appeared on the table was a rather large pork dish topped with a sweet tasty glaze. Once we devoured the meat, a bone 1/4 the size of a human femur was left on the plate. One of my colleagues has 9 dogs and his wife was determined to transport the bone back to Shanghai to feed it to their dogs. Mysteriously, in the midst of all the eating, drinking and laughter, the bone vanished. The waiter assured everyone she didn't take it. A comprehensive top-to-bottom search of the private dining room we were in was conducted to no avail. We even looked out the window with no luck. It was left a mystery. No one knows what actually happened to the bone except, of course, for the person that made it disappear ;)

The Bumpy Road to Property Rights

As real estate development continues at a torrid pace around and the Chinese authorities continued to make strides (ok, baby steps) on the path toward establishing individual property rights, a proverbial bump in the road presented itself in the form of a 30 foot tall "dingzi" (a Chinese word that means "nail" but is also used to describe someone unwilling to vacate their home) in Chongqing (the largest 30 million person city no one has ever heard of).

If a picture is worth a thousand words, the below link says it all.

http://www.ananova.com/news/story/sm_2237937.html?menu

Real Estate developers were unwilling to entice this brave soul to take an offer for their house, which happened to be sitting smack in the middle of the development project. Word of the story spread around forms around China, and the "hard as nails" homeowner became something of a cult hero overnight, viewed by many as someone standing up for the people and testing just how far the newly established property laws went.

Below are some associated quotes:

"At the beginning of March, a photo called "the coolest nail house in history" stirred up a lot of debate. Within the space of a few days, this photo was widely circulated and posted all over the Internet, and a lot of media as well as the general populace were interested in the affair.
This happened at the same time as the Property Law [was being discussed at the NPC], so people were even more curious about it. The final fate of "the coolest nail house in history" will be a famous monument to the progress of the Property Law.

The Tianya post has hundreds of comments representing many different points of view about the Property Law, the evils of state- and privately-owned real estate development, and the the rights of tenants. The online chatter about property rights makes for an interesting contrast with recent discussion of property rights in the traditional media, for example this story excerpted from The Wall Street Journal:
China Magazine Is Pulled As Property Law Looms

A landmark proposal to protect private property was formally introduced into China's legislature amid continuing controversy, and in one possible sign of the legislation's sensitivity, the latest issue of an influential Chinese business magazine that covered it was pulled earlier this week.

It wasn't immediately clear who blocked the issue of Caijing -- a move that came during one of the busiest periods in China's political calendar -- or why. But according to a person familiar with the situation, the issue included articles, among others, on the bankruptcy of a government-controlled brokerage firm and on the piece of property-rights legislation, which has drawn vocal criticism."

The homeowner, Ms. Wu Ping, was quoted as saying:

"Among the residents moving, I am the largest private property owner, furthermore you can basically say I am the only one who has complete papers, such as a property rights land right certificates, they both clearly indicated that it is a building zoned for business. At that time I had just finished renovations, and they (the developer) said they had to tear everything down and people had to be relocated, as a result this was really damaging for us. According to my property right certificate, I am clearly in ownership of 219 square meters, so for this use it should be returned to me."

Below is a link to an interview with Ms. Ping:
http://www.proxzee.com/index.php?q=aHR0cDovL3ZlbnR1cmUxNjAud29yZHByZXNzLmNvbS8yMDA3LzAzLzIyL2ludGVydmlldy13aXRoLWNoaW5hcy1tb3N0LWluY3JlZGlibGUtaG9sZG91dC8

In the end, it all came crashing down, literally. While the effort on Ms. Ping's part was valiant and will undoubtedly encourage imitators across the country, there are some things, property rights included, that will simply not be allowed to stand in the way of continued economic development, that includes "nails in the road."
http://feeds.feedburner.com/~r/DanweiRss10/~3/106193467/chonqing_nail_house_destroyed.php

Everyone Please Remain Calm-It Was Just a Correction

If last week taught us anything, it is that many of the world's most liquid mature equity markets have started taking cues from China, be it justified or not. Previously, the vast majority of people agreed that, given China's unquenchable hunger for resources, China was a significant player in determining world commodity prices (i.e. steel, oil). People also largely agreed that China was in many ways responsible for holding US interest rates down due to their feverish purchasing of US Treasury Bills. Yes, those of you in the US that took advantage of the low interest rates and refinanced your homes in the past few years, you have China to thank whether you want to admit it or not. China's buying of US T-bills has less to do with their attractive investment returns and more to do with keeping their own currency weak relative to the US dollar enabling their export engine to keep running. Keeping US interest rates low is in China's interest, because it keeps US consumers purchasing goods that China exports. Continued export customers keeps China's factories humming and employment up, something critically important in a country that must maintain over 7% economic growth annually to create enough jobs for new people entering the work force annually.

There has been chatter that China, in addition to many other nations (i.e. cash rich Middle-Eastern countries-->price of oil per barrel is denominated in US$), are looking to diversify their FX holdings into other currencies and/or gold. Currently, China holds over $1 trillion in US T-bills. No, that is not a typo. If I'm a market speculator, I'm definitely betting that gold is going up. The economics just make sense. If these countries do indeed choose to dump a percentage of their USD holdings in favor of other currency's or gold, expect US interest rates to jump and money not to come quite so cheap in the US. Adios, to the low financing of the new car.

The events of this past week warrant some consideration. We must ask ourselves, how does an 8% drop in a stock market (China's A-share market) that was among the world's worst performers in 2004 and 2005 and is coming off a year during which it increased 130% send such shock waves throughout the world? The following day, the Dow was driven down almost 4% and other indicies around the world took it on the chin as well for no real reason at all. After a 100+% rise in the China A-share market over 12 months, isn't a slight pull back justifiable, even expected?

Before 2006, the rest of the world didn't care what was happening on China's stock market. It was what many considered to be a casino. Maybe this is what was necessary for people to finally take notice or acknowledge that they already knew subconsicously. Officials have openly stated this year that over 70% of the listed stocks on China's A-share market are worthless and should be delisted. Granted, things are getting better, regulations are beginning to be enforced and more quality companies are starting to list in mainland China, but China's financial infrastructure has a long way to go. A country might be able to build highways and bridges in 20 years, but instilling the concepts of intrinsic value, corporate governance and regulatory enforcement take time no only to implement but to educate people as to why they are necessary for a well-functioning market.

My guess is, this won't be the last "pullback" China's market experiences. I believe there were actually people in China breathing a sigh of relief as the government has been working very hard to find ways to cool the already overheated market. The question is, how will the world react when it happens again, and believe me, it will. That is the nature of an emerging market.

I think we should stop pondering whether or not there is a connection between China's equity markets and the rest of the world or if the aftershocks are justified. Rather, it would be better to accept the fact there is a perception of a connection ingrained in peoples' minds. As one of my coworkers accurately stated, "fear and greed" drive the market. In the end, I think most people think there shouldn't really be a correlation between what happens on China's markets and the rest of the world, however, they "fear" there just might be, and that is enough to cause a panic.

Chinese Stock Market "Smashes" Records Two Days in a Row

2007 is shaping up to be an interesting ride for local Chinese Exchanges.

The Shanghai Composite Index, which tracks domestic Chinese RMB-denominated A-shares and foreign currency denominated B-shares, jumped 1.4% on Monday to close at 3040. This was the highest close since the bourse was launched in 1990. Three of China's largest steel companies lead the charge as Baoshan Steel, Angang Steel and Wuhan Iron and Steel jumped 8 percent, 8 percent and 6.5 percent respectively. Mainland banks China Merchants Bank, China Minsheng Bank and The Industrial and Commercial Bank, which had been responsible for much of last year's rally, fell 5.6 percent, 4.1 percent and 0.8 percent respectively in response to the central government ordering lenders to increase reserve-ratio requirements from 9.5 percent to 10 percent.

On Tuesday, the Shanghai Composite Index fell 8.84% to close at 2771.79, again "smashing" records as institutions locked in profits and individuals sold in response. This was the largest single-day fall since 1997 when the market dipped 8.91 percent following the death of former Communist Party leader Deng Xiaoping. A few listed stocks, including Chan Vanke Co (the nation's largest property developer) and China United Telecommunications Corp (China's second largest mobile carrier), fell 10 percent, the single day limit for individual stocks. Trading volume hit record levels soaring to 131.6 billion yuan (US $16.57 billion), a 42 percent increase over the volume during yesterday's rise. One market participant noted, "selling sentiment might continue for some time if there is no strong policy stimulus from the government." Someone should let this guy know the government is probably very relieved by the pull-back as they have been trying to figure ways to cool the red-hot local stock market that rose over 130% last year and was already up 15% for 2007.

Smart market players will see yesterday's pullback as a buying opportunity and look to jump back in. Liquidity continues to slosh around the markets as China launched a new US $1.29 billion mutual fund (the first new fund in 4 months) yesterday that sold out within 2 hours. Shanghai is also reportedly preparing to allow H-shares, Hong-Kong listed mainland companies, to start trading on local exchanges "soon" in an attempt to continue to increase the size and quality of the domestic market. These will be referred to as CDRs, Chinese depositary receipts. China Mobile and PetroChina are rumored to be among the first Hong-Kong listed mainland companies to sell CDRs. Hold on to your hats, because 2007 should be a wild ride.

Happy New Year...Again; Viva Macau

This week those that follow the Lunar Calendar all over China and the world have been welcoming in the year of the Golden Pig. Chinese New Year is an event that spans an entire week when all work related activity in China virtually comes to a halt. People working in the cities head to train stations and airports to return home to welcome in the New Year with their families. I was in Shanghai when the New Year officially arrived and it sounded like a war zone outside my apartment as people stayed up the entire night setting off fireworks and fire crackers all throughout the city (yes, for all of you envious foreigners, setting off fireworks in the middle of Shanghai is legal). There were so many explosions being set off that it got to a point where I could only hear them, rather than seeing the glittering sky. The next day, an unusually large cloud of smoke hovered over the city.

Against advice not to travel during Chinese New Year, when all forms of transportation are chaotic and packed with Chinese making their way home, I went with a friend to the southern Chinese city of Zhuhai. From Zhuhai we crossed the border into Macau, a place I had only read about and wanted to see for myself.

A few fast facts about Macau:
-settled by the Portuguese in the 1550s
-handed back over to China in 1999, much the way Hong Kong was handed back over to China from the British two years earlier in 1997
-Population of 441,000, 95% of whom are Chinese
-Chinese and Portuguese are the "official" languages, however, I found English to be more widely spoken than Mandarin. Most people in Macau speak Cantonese
-Macau was named after Chinese goddess A-Ma worshipped by seafarers in the region centuries ago. According to legend, a boat was caught in a storm in the South China Sea when a woman who boarded the boat at the last minute stepped up and ordered the elements to desist. Everything became calm and the sailors made it safely to the port of Hoi Keang. The women stepped ashore and walked to Barra Hill where she ascended into the sky. When the Portuguese arrived in the 16th century, they were told the place was called "A-Ma-Gao" (Bay of A-Ma), or Macau as it is presently known.

I went to Macau (the "Next Las Vegas," as the former-Portuguese colony is being touted) to see for myself what all of the hype was about. Hong Kong businessman, 85 year old Stanley Ho, held a monopoly on Macau's gaming industry for some 40 years. Macau had been historically written off as a seedy place where casinos were smoky and dark and shady activity abounded.

In 2004, Mr. Ho's gaming monopoly was broken and American casino moguls Sheldon Adelson (the Sands, Venetian) and Steve Wynn (founder of Mandalay Bay, Mirage, Treasure Island, the Bellagio, the Wynn, and Encore) were granted the necessary licenses to break into the game. An area little recognized outside of Asia, Macau is emerging and actually exceeded Las Vegas in 2006 in gambling revenues. Mr. Adelson opened the Sands in 2004 and Mr. Wynn opened the Wynn in September of 2006. Both have done extremely well. Mr. Adelson recouped his entire $265 million investment in the Sands Macau in 1 year. Plans are in the works for Mr. Andelson to open the Venetian in Cotai (along with 6 other hotel-casinos on Macau islands Cotai and Coloane, a $6 billion investment) and the MGM Grand to open in 2007. Mr. Adelson also just obtained a gaming license for Singapore where he will open a $3.5 billion Marina Bay Sands hotel-casino.

Overwhelmingly, the clientele in Macau is Chinese. In many of the casinos I checked out, I was the only "non-Chinese" person to be found. This was especially true of Mr. Ho's hotels, the Lisboa and the Grand Lisboa among others. The Sands and the Wynn were slightly more international. The focus of hotels and casinos in Macau is gambling. The Chinese are avid but serious gamblers. Slot machines are much scarcer in Macau than in Vegas and many of the games, such as SiBo, Baccarat and other Chinese games, seemed to be the overwhelming favorites of the locals. While some of the dealers were able to communicate in Mandarin, Cantonese and English (or two of the three), there were a few that I encountered that only spoke Cantonese. It took some looking, but I was able to find a blackjack table.

At the table, it was much less of a team game than in Vegas. If you know anything about blackjack, it is a team game, where people at the table can work together against the dealer making moves based on odds. I found this to be true to an extent in Macau, but gamblers there played much more based on feel rather than odds. For example, if the dealer was showing an 8 and two players at the table had busted already, someone with a 12 or 13 was likely to stay and not take a card. This drove me crazy, because decisions were being made based on feelings and superstition rather than cold odds. Nonetheless, it was a very interesting learning experience. In addition, it was impossible to get a drink at the table. I found, people just don't drink when they gamble, as is the case in Vegas, so the casinos cater to that. In Vegas, there are tons of people running around ready to get whatever you want to drink. In Macau, I gambled for 4 hours and one of my friends had to leave the table to get a drink.

Anyone who has spent time in Vegas knows the Asian clientele is extremely important to business there. Previously, those in Japan, Korea, China and other countries were willing to make the trip to the US for the "hotel and casino experience." The emergence of Macau has given these people an alternative closer to home that will undoubtedly hurt business in Vegas. However, given that a lot of the investment being made in Macau is by players who dominate the Vegas Strip, such as Wynn and Andelson, these gaming companies' overall bottom line will not but hurt but actually improved. My guess is,

To me, at this point, Macau is still largely hype. While Macau has come a long way and may bring in more gaming revenues than Vegas, it still lacks something that makes Las Vegas what it is. Vegas has the shows, the performances, more facilities, pools, amusement parks and other activities that make it more of a family destination. Maybe in 5-10 years Macau will have caught up even more and the situation will be different. Macau will continue to draw mostly visitors from Asia and a sprinkle of foreigners who came to Asia solely to experience Macau. Given their investments in Macau, if Mr. Wynn and Mr. Adelson have anything to say about it, the Macau will surpass Vegas in every way sooner rather than later.

Should Emerging Markets be Allowed to Emerge Before They are Expected to Recycle?

I was riding the escalator up to the street-level from the subway yesterday on my way to work. Once I got to the top of the escalator, where a mob of people were waiting on Nanjing Xi Lu, I noticed something interesting. An older Chinese gentleman wearing a worn brown jacket and dusty gray pants was asking people stepping off the escalator for their newspapers. As in many major cities around the world, many people in Shanghai buy a newspaper and read it on the subway. Once they arrive at their destination, they either opt to leave the newspaper on the subway, trash it on their way out or take it with them to finish reading later. I didn't engage the older gentleman further regarding his intended use of the newspapers. Given I didn't have a newspaper visibly in hand, I was of no interest to him. I can only speculate that the older gentleman intended to resell the newspaper to someone else, recycle it for money or put it to some other ingeniously thrifty use.

This incident got me thinking about an issue that isn't new: "Should emerging markets be allowed to emerge before they are expected to recycle?" Many present-day industrialized nations, such as the US, were allowed to emerge without environmental restrictions placed upon them. The US developed before there was any awareness of the detriments of greenhouse gases produced by fossil fuels, the Kyoto Protocol was written or Al Gore informed us about "The Inconvenient Truth."

Many environmentalists, investors and business people alike pay lip service to "clean tech" and "green energy," but the reality is the entire world, not just the US, is "addicted to oil." The United Nations Intergovernmental Panel on Climate Change (IPCC) stated there is now a 90 percent probability global warming has been perpetuated by the combustion of fossil fuels and other human activity. This is up from a 66 percent probability from the same group in 2001. I am expert, but I would venture to say there is a 100 percent probability humans have had a hand in global warming. The question now becomes, what will it take for us to clean up? Sadly, I believe running out of the "black gold" is the only thing that will really force us to change.

Rich countries are in more of a position to set an example for weaning ourselves off of oil and explore other energy options because we have the money to plow into research and development. While advancements have been made, we are nowhere near where we need to be. Right before our eyes, other nations are in the process of developing. Jim O'Neill, of Goldman Sach's Economic Research Group, coined the acronym "BRIC" in 2001 to describe Brazil, Russia, India and China. Mr. O'Neill's argues that in 40 years BRICs economies together could be larger than that of the G6's. He goes on to say it is possible, by 2050, only the US and Japan will be among the world's 6 largest economies in US dollar terms. This will create a huge sift and complicate decision making in the world, especially as relates to environmental issues. If Mr. O'Neill's projections are accurate, most of the world's largest economies by 2050 will not be the richest, as is the case today. He article is worth a read and can be found at http://www2.goldmansachs.com/insight/research/reports/report6.html


The US is the largest oil consuming nation in the world. What most people don't realize is that oil was discovered in Pennsylvania and its first major application was as a lighting agent, as cars weren't around in 1860 or so when it was discovered. The US was also a major exportor of oil until the mid-1970s. If you understand the history of oil, it goes a long way toward understanding the history of the world and geo-political relations since the late 19th century. I highly recommend "The Prize-The Epic Quest for Oil, Money and Power" by Daniel Yergin to those of you interested to learn more. It is a fascinating read.

Presently, the US uses most of its imported oil today to fuel cars. As the BRIC nations and other countries around the world continue to come of age, progressively more cars will be on the world's roads. This means, assuming things stay roughly the same, we'll demand more of a finite resource unless we come up with other means of powering our vehicles. What will it take for this to happen?

Flower Arbitrage

In the spirit of Valentine’s Day, a day when many guys around the world will find themselves hustling around last minute to buy chocolate no one will eat, flowers that will wilt and perfume that will nauseate, I wanted to share an idea. This idea occurred to me today when a friend told me a bouquet of red roses today in the flower shop ran them $15 USD. If relationships have financial statements, and I believe they do, flowers definitely fall under operating expenses on the income statement and show up as an asset under goodwill on the guy’s balance sheet.

This got me thinking. With so many asset classes around the world over-valued and traditional arbitrage opportunities becoming progressively harder to identify, I see a real profit opportunity around “flower arbitrage.” The idea is simple: a bouquet of nicely arranged flowers costs $15 in China. I am sure there are guys in New York and other cities around the world dropping $100-200 on a lesser bouquet. We simply work out a way to buy flowers in China and sell them in the US, focusing on holidays, such as Mother’s Day and Valentine’s Day, where prices in the US are especially jacked up. All we have to do is go to Fred Smith at FedEx and convince him there is a market for refrigerated 24hr. FedEx delivery airplanes from China to the US. I think Mr. Smith will buy in. After all, he is a visionary who revolutionized the mail delivery service despite his Yale professor giving him a C on the “FedEx” concept and countless VC firms turning down his request for financing. I think this idea is a go! Chinese chocolates anyone?

When green is go, yellow is the same as green and red is go... faster!!!

Every morning I walk to and from work. I walk primarily due to the fact that it is virtually impossible to get a cab in Shanghai, especially during prime hours of the day when people are either head to work or home from work. Conveniently, I don't live near a subway line either, so I am left with little choice. I am sure there will be future blog posts to explain this frustration in utter detail down the road.

At many major intersections in Shanghai, two "traffic assistants" are positioned in bright orange reflective badges, hats, sunglasses and armed with a whistle in hand, similar to your elementary school crossing guard that used to greet you everyday as you passed going to and coming from school. I give the traffic assistants credit, because every one of them seems to take their job very seriously. If anyone so much as thinks about putting their toe on the street or even hovering it over the curb, the traffic assistants will assault them (not literally) with their whistle and shout at them in unintelligible Shanghainese. If a foreigner happens to garner up the courage to run the gauntlet, they simply motion you to back up. This sounds simple enough, but it is quite a task to get 50 people at an intersection in China not to venture out into oncoming traffic.

The funny thing is that it is all a front. Once in a while (or quite often actually) someone will try to sneak past the traffic assistant and cross the street or cross in the middle of the street away from the intersection (what we used to call "jaywalking"), because, for some reason or another they are in a bigger hurry than everyone else or they think they just don't have to follow the rules. It is quite comical when this happens and the traffic assistant notices, because the traffic assistant will start blowing the whistle feverishly and waving both arms in the air like they have been stuck on a desert island for 2 years and are trying to wave down a passing ship. Many times, the people crossing are already across or at least halfway across the street. The animated whistle blowing and arming waving is as severe as the punishment gets. The traffic assistant can't do anything to you but scream and yell. Sometimes, it is just worth it to sit there through a few red lights and watch the charade. It is especially hilarious when a foreigner crosses, because the foreigner simply doesn't understand what they are saying or can at least appear not to understand the rules. Some many things are about perception.

If you choose to break the traffic assistant's rules and cross the street on your own when the light is red, you take your life into your own hands to an extent. There are motorcycles whizzing by, taxis cutting each other off and buses that look like a bat out of hell coming through the intersection.

Despite this danger, I am not convinced it is any safer to cross when the walk light is green and the traffic assistant "grants" you passage. Why? Because red doesn't mean stop. it means go faster to bicycles, motorcycles, buses, taxis, rickshaws and anything else with wheels that you might happen to see on the street in Shanghai. You need to pause a good ten seconds after "the sign says it is safe to walk" and the traffic assistant waves you through before it is actually safe to cross. Even then, it isn't totally safe. Many locals assume others will continue to come through the stoplight even after it is red. It is like it is hardwired into their heads and they pause unconsciously. They would think you are crazy if you started running across the street when the light turns green. People in other countries might pause a few seconds and then walk, but they would think it ridiculous to pause for 10 or 15 seconds while all the stragglers floored it to speed up to "make the light" or "just miss the light."

I have seen people in Shanghai, mostly foreigners, nudge motorcycles and bicycles that come pealing through the intersection after the light is clearly red. To the people whizzing by, they didn't do anything wrong. Most of the time, it is innocent fun, but once in a while someone will fly off a bicycle or lose balance on their motorcycle carrying a family of 4 and tip over. It rarely ever turns into anything more confrontational than that. To me, it is a simple misunderstanding: in many countries around the world green means go, yellow means speed up and red means stop, but in China (and many many other countries), green is go, yellow is the same as green and red means go faster so you can "just miss" the light!!!

Long lines, forgotten passwords, and all-star mother-in-law money managers-China's Investment Environment

If you spend enough time in China, you learn fairly quickly the "herd mentality" abounds. It is evident everywhere, restaurants/ticket counters/kiosks/brokerage lines/ect. The Chinese are big believers that where there is a line (or crowd), there must be something worth waiting for or worth seeing. Maybe this is why there constantly seems to be droves of people pushing to get "an edge." Receiving a shove in the back is never personal, it is just a friendly reminder that you better pay attention, because someone is there to capitalize if you don't. It is a real "hustle" attitude which fits nicely with the idea of free markets and "no free lunches." It matters less if there is really an substance behind what seems to be so sought after, rather the perception of substance is enough to draw crowds. At Starbucks, are coffee beans, hot water and a frothy top really intrinsically worth $4? Maybe not, but that is irrelevant. The marketing folks at Starbucks have done a text-book job of convincing people it is worth the price.

After lingering in the abyss since 2001, China's A-share stock market returned 130% to investors and speculators alike in 2006 making it the best performing market in the world. The A-share market is already up another 10-15% in 2007. Now, do the companies behind these stock tickers actually justify such valuations? It is hard to say for sure, because reliable company financial data is extremely hard to come by in China. If one cannot trade based on reliable fundamentals, that only leaves one option: technical trading.

Stocks in China are largely traded a physical brokerage locations or over the phone. Online trading is still relatively new in China, but will likely gain traction in future years. Due to the "can't miss" investment opportunity that is the A-share market, local Chinese are rushing to open accounts at breakneck speeds to get a piece of the action. By some estimates, as many as 70,000 new accounts are opened daily. With the release of Qualified Foreign Institutional Investor (QFII) regulation last year, foreign investment capital was allowed to flow in to the A-share market for the first time.

While foreign individuals (such as myself) are not allowed to open brokerage accounts in China, a quota of approximately $11 billion allowed to be invested in China's stock market was spread across 50 foreign institutions. Billions more is waiting at the door itching to rush in. Given the fact there is already excess liquidity sloshing all around China and, in the interest of not having the market spike 1000%, the flood gate will be opened slowly to foreigners. Historically, most Chinese lacked many investment options, as the average "Joe" or "Li" isn't allowed to invest abroad. Average people could choose to leave their money sitting in a bank account (where approx. $2 trillion sits today) earning 1.5% or take their chances in the local equity markets. Presently, the equity markets are perceived as more legitimate than before as better quality companies are choosing to stay at home a list locally, taking advantage of the liquidity, and regulations are being more actively enforced. Almost 1/2 of the companies listing in Shanghai last year, were already listed abroad in markets like Hong Kong. As a result of the perceived value, regular people are getting in.

I sometimes hear local people complain they had an off year because their portfolio only returned 70% in 2006. Granted, they missed replicating the overall index, but there are people running hedge funds and investment firms all over the world that would call a 70% a better than average year.

At a dinner I attended the other day, a Chinese friend (who had spent 5 years abroad) told me how nervous she was investing in the local market. She told me last week she made a trip to a local brokerage house to execute a trade. While she was waiting in line, a man, who by her estimate was around 80, starting flipping out. During the 1990s this would have been interpreted as normal, because brokerage houses in China were the equivalent of bingo halls in the US. They were a place where retired people went to pass the time and throw some money around never really expecting a return. To them, it was the price of entertainment.

As it turned out, he was throwing a fit because he had forgotten the password to his brokerage account, so he couldn't make the trade he wanted when he wanted. Her words were, "if he is representative of who is investing in the market today, things are getting way out of hand." The present investment environment in China is symbolic of the mania of the late 1990s that swept across the US. Many people said, once my barber starting getting into the tech game, they knew it was time to liquidate. Maybe we should tailor that statement to read, "once the 80 year old guys forgets his password and flips out in the brokerage house, it is time to get out or at least take a knee for a while."

One of my coworkers' mother-in-law is managing a portion of he and his wife's money. Now, it would be one thing if she was an experienced trader or money manager, but she is neither. She doesn't even know what company financial statements are or anything about investment multiples or sophisticated analysis techniques, which might be just as well given local conditions. Her investment strategy is "never invest for the long term in China's stock market." This might sound crazy, but it is highly logical given the volatile roller-coaster ride that epitomized China's markets during the 1990s. She returned in a measly 35% return last year because, in his words, "she's too conservative." I advised my coworker to fire his mother-in-law as his money manager and run down one of the 80 year-old guys down at the brokerage house to take over, preferably one that can, at least 7 times out of 10, recall his/her password. He thought that wouldn't be a good move given the "probable less than desirable implications on the home front."

Moral of the story: well, there isn't one. It is just a very interesting time in the wild wild east where long lines, forgotten passwords and all-star mother-in-law money managers tell you all you need to know about the state of the local markets.

If there are Chinese Americans, can there be American Chinese?

I walked into a room last night filled with 200 or so guests attending a wedding in Shanghai. Normally, I'd be less apprehensive about going to a wedding, unless it happened to be my own, but this situation was decidedly different. Since I happened to be the only non-Chinese person (or 大鼻子"big nose" as the Chinese sometimes refer to foreigners) in the entire room, upon my entrance, 200 or so sets of eyes fell on me.

After I was introduced to some people by my friend, a bit of the initial awkwardness faded. My head was on a swivel keeping up with the animated MC and watching the bride run in and out of the room, each time in a different dress. Like standing at the chaotic Chinese intersections, I was trying to find the logic to it all. As I sat there enduring 7 courses of food that was served to us in 10 minute intervals, toasting the bride, groom and various others with countless shots of 黄酒("yellow alcohol"), a question occurred to me: "is there such a thing as an American Chinese, and, if not, will there ever be?"

It took me spending a substantial amount of time outside of the US to really recognize the diversity that is woven within society in my own country. Sometimes it takes leaving and coming back again to really catch what was clearly in front of you the entire time. Walking down the street in NY, LA, San Francisco, Chicago, Houston or any other major city, you are bound to run into people who are Chinese American, Mexican American, African American, Indian American, Korean American and many more. Some of them are first generation and some are 4th generation Americans. It is quite amazing to listen to some of the stories of struggles people endured and paths they took in search of the "American dream (if you or your family has one, I'd like to hear about it)." Many are in the very interesting, and sometimes complex and challenging, situation of trying to maintain their own culture while simultaneously working to blend in to American society and culture (What is American culture? I'll write about this more later). Many times, this struggle goes unnoticed to most.

As a white middle-class male, I never really thought of myself adding diversity to any group by virtue of where I was born, my skin color or the socioeconomic situation I happened to be born into. As I have gotten older and experienced more, I spend less time thinking about things I cannot control. In reality, we have no control of where they are born or what economic situation they are born into. However, we do have some control of how diverse our minds are. I've made a conscious effort to "diversify" myself by virtue of my experiences and life choices I've made. I wouldn't trade it for anything.

In the huge ballroom I thought to myself "can any non-Chinese really be viewed as Chinese?" My initial response and simple answer to this would be, "no." Although I was able to follow the ceremony, engage in conversation with everyone in the room and at least attempt to lean on my understanding of Chinese culture to blend in, the fact is I am not Chinese. Regardless how many years I spend in China or how many dialects of Chinese I speak, I will always be viewed as a 老外("foreigner"). It begs the question, is this fair or balanced given that millions of once non-Americans become Americans every year? I think the fairness of it all how or I feel about this is of little importance . The important thing is to recognize this is the reality of the situation. There is little I can do as an individual to alter the ingrained mentality of a nation, especially one as old and proudly rich in culture as China. What I can do, is try my best to act as a bridge between my own culture/country and others.

In order to bridge cultures, while language is extremely important, it is not enough. Those that say it isn't important, are deluding themselves. It would be the equivalent of saying, learning English wouldn't be necessary for someone to really understand American culture and society. Those that say language isn't important, many times, haven't taken the time to learn it themselves. So, they don't know little cultural insights and nuances they are missing. While English may be the indisputable world language of business, that shouldn't be confused with the universal language of everything. Language is merely a tool or gateway to understanding the mentality of people. If you agree that people think in a language (are the thoughts in your head just thoughts, or do we think in a language? Can there be thoughts without language?), learning other languages is essentially learning different ways to think. This can put us on the same wavelength with those different than ourselves. What I have also come to appreciate is that learning language is a life-long investment. It is impossible to put languages in boxes and pull them out only when we need them expecting them to be as perfect as they were before. Inevitably, if you don't use it you lose it. Frustrating, but true.

Starting from the Middle

It is only fitting that this blog should begin this way-in a illogical (at least to the Western mind) fragmented fashion. Actually, most of my favorite movies start in the middle and follow the story line until the end. It is only in the prequel, that shows up in theaters 2 years later, that we actually find out what happened in the beginning. Maybe the beginning matters less than the journey in the middle and result at the end.

Instead of logging onto Blogger and creating a blog in 5 seconds as advertised, unanticipated challenges have already presented themselves. The entire site is in Chinese. Typically, when someone doesn't understand something or is totally lost, they might say something like "this might as well have been in Chinese." However, having studied Chinese for over 5 years now (when I can clearly remember 5 years back I feel like old, or at least older. Maybe it is at the point when I cannot remember 5 minutes ago that I am in fact "old"), I have to tailor that statement to read something like "this might as well have been in Java or Arabic." I do read some Chinese, but things would have been a lot easier had it been in English.

These challenges are fitting because it is in a sense a microcosm of challenges and confusion faced everyday by foreigners running around China. Take traffic for example. One would be hard-pressed to find a more dynamic scene than an intersection in China. There are cars coming from every direction, taxis leveraging for position, guys are on bicycles smoking and talking on a cell phone while transporting mounds of "stuff" (which is actually quite impressive), people are eating, talking, squatting, spitting; it would appear to be a very chaotic. However, mysteriously there are fewer wrecks, accidents and miscommunications that one might think. I guess if everyone assumes everyone else is not going to follow traffic rules, there is an element of anticipation built into everyone's head. Where foreigners see chaos, the Chinese see normality and logic.

I am going to save elaborating about how I got to China. Like my favorite movies, this blog will pick up in the middle of my time in China. Maybe I'll be able to shed some light on the whys and hows of my ending up in China along the way. My intention is to act as somewhat of a bridge for people interested in knowing more about this dynamic place through the lens of my day-to-day life. Lessons about how to make sense of China can be found everywhere: buses, airports, on the street, in tea houses, in cabs, in line, ect. I welcome you on this journey as I continue on the trajectory of trying to sort out the Chinese intersection. I am off to a Chinese wedding, which should afford me some interesting things to share later.